What happens when banks are afraid or reluctant to give out money?
Sunday, February 01, 2009
By dodjit.com
The last couple of months have been hectic, as the indices have bounced back and forth trying to find a market bottom. When analyzing the broader market via the S&P 500, one can see that despite deteriorating economic data, the markets continue to hold above their prior lows. The U.S continues to lead other economies, sending them into a downward spiral due to their lack of consumption. Economies that rely on the U.S’s consumption have found their selves battling against an economic collapse, while other economies that have profited in the past from financial services have dropped, due to the extensive losses. For example the U.K economy has flourished in the past on services, particularly banking, insurance and business services, which accounted by far for the largest proportion of their GDP.
Official are doing their utmost to try to control the situation, but analysts are still weary as to whether current efforts are going to be enough. To date, officials in the U.S have a remaining $350 billion out of the original $700 billion bail-out plan, to try to put the economy back on track. Despite the large amount of remaining funds, analysts are now believing are now estimating that it is not going to be enough to heal the economy. Headlines showed this weekend that U.S officials are already preparing their next steps to help the battered economy. Over the weekend regulators in the U.S closed an additional 3 banks bringing the number of banks closed since the beginning of this economic crisis, to a horrifying number of 31 banks.
Monetary easing is one method to revive a battered economy, but what happens when the money that is being pumped into the financial system isn’t released to the public?
Government officials have been quick to draw their guns, flooding the financial markets with excessive cash, while engaging in fiscal stimulus plans. Some banks have been nationalized while others have liquidated their assets stocking up on cash. Even though funds have been added to the markets, banks are reluctant to ease on their credit conditions, forcing consumption lower. Even though Libor rates are decreasing, they are not falling fast enough to ease the economic situation. Lack of consumption has put pressure on growth and inflation, forcing them both into a downward spiral.
From what was meant to be a simple monetary easing process, has turned out to be a much more complicated situation as consumer consumption continues to fall effecting inflation and growth, forcing the Fed to use all its tools and option. They have already reduced their fund rate to a 0-0.25% level, and it is still not helping the economy.
When taking a glance at the following chart one can see that a similar situation is occurring in all the economies. Central banks are battling decreasing inflation trying to prevent deflation.
Deflation- A general decline in prices, often caused by a reduction in the supply of money or credit. The same situation happened in Japan and led to a lost decade.
Despite all the negativity in the markets, as mentioned above the indices are still holding above their prior highs. One must take into consideration that interest rate changes do not have an immediate effect on the economy and normally take 6-9 months to leak through the financial system.
When analyzing the bond market one can see that money has been leaking out of long term bonds, but stocks have failed to rally. In addition volatility has decreased from its prior highs now trading around 45 points. Gold has continued to show strength, while currencies are showing mixed directions.
Facts
• The Dollar continues to hold high due to market skepticism
• Gold is pacing forward
• Deflation concerns are now arising
• Currency pairs are showing mixed signals
• Economic growth continues to drop
Conclusion
• Previous monetary action should start to affect the economy.
• The major indices must hold above their prior lows to maintain relative strength
• A drop below their prior lows will lead to mass selling.
• If inflation continues to drop, Gold could continue to increase
• Market uncertainty along with decreasing inflation could lead to consolidation on all the markets, including currency pairs.
S&P500 Daily Chart
Gold Daily Chart
*
Both charts are courtesy of stockcharts.com
Information reliability and liability: The contents are solely aimed for the use of "Experienced" investors in the financial markets who are fully aware of the inherent risk of trading. dodjit does not accept any liability for any loss or damage whatsoever that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in our trading recommendations. I make no warranties or representations in relation to the Information (including, without limitation, in relation to its accuracy or otherwise) and do not warrant or represent that the services will be error free or uninterrupted. Copyright: This article is subject to and protected by the international copyright laws. Use of the information brought in this article is subject to making fair use only in accordance with these laws. It is not permitted to copy, change, distribute, or make commercial use of the information except with permission of the holders of the copyright. Risk Disclosure: The risk of losses involved in the transaction or speculations in the financial markets can be considerable. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. Speculate only with funds that you can afford to lose.
Sunday, February 01, 2009
By dodjit.com
The last couple of months have been hectic, as the indices have bounced back and forth trying to find a market bottom. When analyzing the broader market via the S&P 500, one can see that despite deteriorating economic data, the markets continue to hold above their prior lows. The U.S continues to lead other economies, sending them into a downward spiral due to their lack of consumption. Economies that rely on the U.S’s consumption have found their selves battling against an economic collapse, while other economies that have profited in the past from financial services have dropped, due to the extensive losses. For example the U.K economy has flourished in the past on services, particularly banking, insurance and business services, which accounted by far for the largest proportion of their GDP.
Official are doing their utmost to try to control the situation, but analysts are still weary as to whether current efforts are going to be enough. To date, officials in the U.S have a remaining $350 billion out of the original $700 billion bail-out plan, to try to put the economy back on track. Despite the large amount of remaining funds, analysts are now believing are now estimating that it is not going to be enough to heal the economy. Headlines showed this weekend that U.S officials are already preparing their next steps to help the battered economy. Over the weekend regulators in the U.S closed an additional 3 banks bringing the number of banks closed since the beginning of this economic crisis, to a horrifying number of 31 banks.
Monetary easing is one method to revive a battered economy, but what happens when the money that is being pumped into the financial system isn’t released to the public?
Government officials have been quick to draw their guns, flooding the financial markets with excessive cash, while engaging in fiscal stimulus plans. Some banks have been nationalized while others have liquidated their assets stocking up on cash. Even though funds have been added to the markets, banks are reluctant to ease on their credit conditions, forcing consumption lower. Even though Libor rates are decreasing, they are not falling fast enough to ease the economic situation. Lack of consumption has put pressure on growth and inflation, forcing them both into a downward spiral.
From what was meant to be a simple monetary easing process, has turned out to be a much more complicated situation as consumer consumption continues to fall effecting inflation and growth, forcing the Fed to use all its tools and option. They have already reduced their fund rate to a 0-0.25% level, and it is still not helping the economy.
When taking a glance at the following chart one can see that a similar situation is occurring in all the economies. Central banks are battling decreasing inflation trying to prevent deflation.
Deflation- A general decline in prices, often caused by a reduction in the supply of money or credit. The same situation happened in Japan and led to a lost decade.
Despite all the negativity in the markets, as mentioned above the indices are still holding above their prior highs. One must take into consideration that interest rate changes do not have an immediate effect on the economy and normally take 6-9 months to leak through the financial system.
When analyzing the bond market one can see that money has been leaking out of long term bonds, but stocks have failed to rally. In addition volatility has decreased from its prior highs now trading around 45 points. Gold has continued to show strength, while currencies are showing mixed directions.
Facts
• The Dollar continues to hold high due to market skepticism
• Gold is pacing forward
• Deflation concerns are now arising
• Currency pairs are showing mixed signals
• Economic growth continues to drop
Conclusion
• Previous monetary action should start to affect the economy.
• The major indices must hold above their prior lows to maintain relative strength
• A drop below their prior lows will lead to mass selling.
• If inflation continues to drop, Gold could continue to increase
• Market uncertainty along with decreasing inflation could lead to consolidation on all the markets, including currency pairs.
S&P500 Daily Chart
Gold Daily Chart
*
Both charts are courtesy of stockcharts.com
Information reliability and liability: The contents are solely aimed for the use of "Experienced" investors in the financial markets who are fully aware of the inherent risk of trading. dodjit does not accept any liability for any loss or damage whatsoever that may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in our trading recommendations. I make no warranties or representations in relation to the Information (including, without limitation, in relation to its accuracy or otherwise) and do not warrant or represent that the services will be error free or uninterrupted. Copyright: This article is subject to and protected by the international copyright laws. Use of the information brought in this article is subject to making fair use only in accordance with these laws. It is not permitted to copy, change, distribute, or make commercial use of the information except with permission of the holders of the copyright. Risk Disclosure: The risk of losses involved in the transaction or speculations in the financial markets can be considerable. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. Speculate only with funds that you can afford to lose.
